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Pound Rises to One-Year High as Outlook Brightens for UK Economy

An employee counts 20 British pound sterling banknotes at a service counter window in this arranged photograph inside a currency exchange store in Brussels, Belgium, on Wednesday, Jan. 16, 2019. “There is not an awful lot to say today because we don’t know what our British friends are going to do after the vote in Parliament yesterday,” Margaritis Schinas, spokesman for the European Commission, told reporters in Brussels. (Yuriko Nakao/Bloomberg)

(Bloomberg) -- The pound rose to a one-year high, extending its peer-beating run this year amid an improving economic outlook and newfound political stability that has set the UK apart from other nations.

Sterling rose as much as 0.8% to $1.2949, the strongest level since July 2023. The latest leg higher was triggered by data that showed US inflation cooled last month, and a report earlier in the day that the UK economy expanded at twice the pace expected in May. 

The pound has outperformed all of its major peers this year on expectations the Bank of England will have to keep interest rates higher for longer. While some central banks are already cutting rates, the BOE is still tacking a stubbornly tight job market, and inflation that remains persistently high in the services sector. 

More recently, optimism that a landslide victory for the newly elected Labour party will put an end to years of political turbulence has added to those gains. Goldman on Wednesday recommended buying the currency, saying it can climb to $1.30 within two weeks.

“The UK now has arguably the most stable government in the G7 over the next five years, due to the size of the majority,” Shahab Jalinoos, global head of FX research at UBS Investment Bank in New York, wrote in a note. “We think the GBP should finally see the tide of structural flows move in its favor for the first time in the post-Brexit-vote era.”

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Money markets are currently pricing a roughly 50% chance of a BOE cut in August and 49 basis points of easing in total by the end of the year. That’s about 10 basis points less than what’s expected from the Federal Reserve for 2024.

“Being long GBP on crosses over a longer horizon also looks attractive to us, particularly against other ‘risky’ currencies, ” Goldman strategist Karen Reichgott Fishman wrote in a note. 

--With assistance from Greg Ritchie and Vassilis Karamanis.

(Updates throughout.)

©2024 Bloomberg L.P.

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